The Big Book 2020, at over 450 pages, has continued the roll-out of our ‘Sense & Sensitivities’ research format with contributions from our analysts on over 100 Small and Mid-Cap companies. This format, introduced last year, presents our understanding of each company and its business positioning in a clear and concise manner, focusing down on pivotal issues that are key to assessing any investment. We have also highlighted our Best Ideas for 2020; 12 interesting companies whose financial performance is benefiting from a number of differing positive drivers including strong structural growth markets, management change and continued successful M&A.
Great outperformance delivered from our 2019 Best Ideas
At the start of 2019 we produced a two part best ideas selection formed in the belief that we were near to, or at the point of maximum uncertainty. Performance has been very strong, with our core ideas outperforming the market last year by 19.2% and our domestic bouncers by 7.1%. Our ten core ideas were based on stocks that our analysts believed to be good, consistent, quality businesses, with strong management and good supporting dynamics and financial strength. Our domestic bouncers selection highlighted six stocks that we believed would perform strongly in the event of a Brexit resolution and the unwinding of uncertainty more generally, which finally came through with a flourish at the end of the year.
Refreshing and growing our research coverage
2019 was a particularly busy year for N+1 research with 39 stock initiations and, of course, the continued rollout of our Sense & Sensitivities format which continues to be well received by both our institutional clients and subject companies alike. In aggregate, our initiations performed well with an average 18.3% rise since their publication. It was also pleasing to see the top 10 stocks all exceed a 30% return with Renalytix AI (+165%) and Kape (+104%) leading the field.
2020 outlook – investing for growth
As we move through 2020 we intend to add further to our coverage as we drive towards our targeted coverage of 200 Small and Mid-Cap companies. We expect to continue to hire additional distinctive analysts to the department as we look to cement our position as a leading provider of high quality differentiated Small and Mid-Cap equity research.
12 stock highlights for 2020
1. Augean* (AUG LN) – Well positioned for further growth (written by Richard Hickinbotham, Head of Research)
The Group occupies a strong position in its markets with strategically located hazardous waste treatment and disposal facilities. 2019 has seen the Group perform very strongly as it has retained and won new business whilst also continuing to address costs and operational inefficiencies. Augean has over 40% of the UK’s hazardous landfill capacity and trends in Energy from Waste (‘EfW’), nuclear and North Sea decommissioning are particularly supportive of sustained progress. EBIT margins over 20% are stand out and drive strong cash flows that will quickly reduce debt, following the (disputed) HMRC payment, and allow for a resumption in dividends. There are opportunities to leverage operations through select acquisitions.
2. Eckoh* (ECK LN) – Global Secure Payments Leader (written by Kevin Ashton, Senior Research Analyst – TMT)
Eckoh is firing on all cylinders at present as demonstrated by interim results which showed u/l group organic revenue growth of 20% and significant margin improvement. The cash cow UK business is set to generate steady growth on cross-sell and omni-channel (especially via the cloud-first Experience Portal). The real opportunity is the rapidly growing US Secure Payments business where Eckoh is market leader with a patented product and an enormous market opportunity.
3. EKF Diagnostics* (EKF LN) – Steady compounder with growth options (written by Chris Glasper, Equity Partner & Senior Research Analyst – Healthcare)
EKF Diagnostics is a global, integrated medical diagnostics business. It develops, produces and distributes a range of analysers for use in Point-of-Care settings for the detection and management of diabetes, anaemia, women’s health & sports medicine as well as supplying a range of specialist clinical chemistry analysers and reagents to the Central Laboratory market. It has strong market positions in Haematology and Diabetes management and a razor/razor-blade model affords a high level of recurring revenues. An innovative partnership with Mount Sinai hospital group has already yielded one significant success, with more in the pipeline.
4. Future* (FUTR LN) – The Future is bright (written by Caspar Erskine, Senior Research Analyst – Technology)
Future has consistently delivered on organic and acquisitive growth, scaling its online presence and improving monetisation of its audience base. The £100m Purch acquisition has been successfully bedded down, with transition of sites to the Vanilla platform helping to drive audience growth in Tom’s Guide and Tom’s Hardware, up 27% and 48% respectively. TI Media, Future’s largest acquisition to date, is forecast to close at the end of April and presents material opportunity for cost and revenue synergy. Momentum has been strong and there is scope for further acquisitions.
5. IMImobile* (IMO LN) – Transforming the customer journey (written by Caspar Erskine, Senior Research Analyst – Technology)
IMImobile is a leading end-to-end Communications Platform as a Service (CPaaS) provider targeted at Enterprises globally. The Group focuses on the automation and improvement of end-user engagement, improving customer experience (CX) and reducing costs. Quality of service is a key industry battleground for IMImobile customers, with the Group exceptionally well-placed to deliver continued organic gross profit growth by enabling Enterprises to intuitively interact with end-users over their preferred channel. Rising interaction volume, a market-leading channel range, and an Enterprise grade CPaaS platform underpin a positive outlook.
6. Instem* (INS LN) – Pushing on multiple fronts (written by Chris Glasper, Equity Partner & Senior Research Analyst – Healthcare)
Instem is a market leader in its field and is now beginning to see the benefits of years of investment. A significant reorganisation in 2017 has created a much more scalable platform and the focus on driving SaaS and other recurring revenues is improving both margins and quality of earnings. After a strong performance in 2019, we continue to see significant organic and acquisitive growth potential.
7. JTC (JTC LN) – Strong global real estate specialist (written by Andrew Watson, Senior Research Analyst – General Financials)
JTC Group has made a successful debut on market over the last 18m, delivering solid organic growth and 4 bolt on acquisitions. We see a quality income stream from persistent income in institutional and private client mandates, which are essential to preserve the integrity of the tax structures in question. JTC has shown it has the ability to capture continued organic growth, and it has demonstrated an ability to complete accretive acquisitions.
8. Marlowe (MRL LN) – Critical service provider (written by James Tetley, Deputy Head of Research)
Marlowe has grown rapidly since formation in 2015, principally via acquisition. With revenue approaching £180m, Marlowe now has meaningful scale but plenty of room for growth in fragmented markets with a value estimated at over £4bn. Marlowe’s businesses are characterised by a high proportion of annuity/recurring revenues, longstanding customer relationships and attractive margins. Its breadth of services, investment in industry leading technology and national presence represent a significant competitive advantage. Management’s ambition is to double the size of the Group over the medium term, creating the UK’s leading health & safety and compliance services business.
9. Mercia Asset Management* (MERC LN) – Profitable asset manager, heading to evergreen (written by Andrew Watson, Senior Research Analyst – General Financials)
Mercia has developed a profitable asset management platform with £750m of AuM, following the recent acquisition of NVM’s VCT business. The investment of 3rd party AuM into early stage tech, engineering and IT opportunities stands to capture a return premium over the longer term. Where there are stand out candidates, Mercia invests in these on balance sheet as “Emerging Stars” – with sufficient funding to see the portfolio through to evergreen status.
10. MJ Gleeson* (GLE LN) – Strong demand underpinned by affordability (written by James Tetley, Deputy Head of Research)
MJ Gleeson’s shares have rallied post General Election, reflecting a broader improvement in sentiment towards the housebuilders and, in particular, to those companies that stand to benefit from a re-balancing of investment towards the North and Midlands. Recent trading has been positive and demand strong at the start of 2020. We see James Thomson as a strong appointment as CEO and expect him to build on Gleeson’s recent success as the 2,000 home target comes into sight.
11. Superdry (SDRY LN) – Strategic reset to start bearing fruit in H2 cal 2020 (written by Matthew McEachran, Equity Partner & Senior Research Analyst – Retail)
Superdry is undergoing a strategic reset after a period of poor trading and loss of design focus. The 2 key concerns we flagged last year have been addressed, namely poor retail execution & persistent discounting, with over stock reducing rapidly. A reinvigorated range to broaden appeal is now in the pipeline which is well structured/segmented. Having seen some of the improved design content for the autumn season we believe the brand can be rebuilt. There is the prospect of a geared recovery starting in H2, as higher margin sales growth is achieved off a reducing cost base.
12. Ten Entertainment (TEG LN) – Transition to one-stop family entertainment operator (written by Sahill Shan, Senior Research Analyst – Leisure)
We like the way TEG is progressively transitioning from a bowling company to a broader, one-stop family entertainment proposition. Bowling remains the anchor offering but this is increasingly being supplemented by new experiential products to maximise sales. We recently had a good trip to the relaunched Cheshire Oaks pilot site and were impressed by the steps the new CEO is making to broaden the customer proposition to drive footfall. This bodes well for future organic growth to complement site expansion.
* N+1 Singer Corporate Client
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